I bet last Wednesday’s 214-point Dow Jones drubbing got your attention!
That drop was the Dow’s largest single-day loss in more than three years. It sure put a damper on the “Dow-about-to-hit-a-new-all-time-high†talk.
With yesterday’s close, the Dow, which had been on the verge of busting its record high, suddenly finds itself down 4.4% since May 10, the day the Federal Reserve raised interest rates for the sixteenth time.
The Nasdaq has fared even worse, losing 7.1% over the same period!
To me, all this pain is just the start of a long slide down a very slippery slope for U.S. tech stocks.
In fact, I’ve been so convinced that domestic tech stocks are heading lower, these are the exact instructions I gave to subscribers to my options service, Stock Market Dogs, on Friday, May 12:
“Step 1: Buy more puts
“Step 2: Get ready to buy moreâ€
Put options help investors protect themselves and profit from declining stock prices. It works like this: You buy a put option contract for a set amount of money. This contract gives you the right, but not the obligation, to sell a fixed number of shares at a fixed price (the “strike†price) within a predetermined amount of time. The more the stock price falls, the more the put option is likely to be worth.
The good news for owners of put options (bad news for owners of the stocks) is that I think U.S. tech stocks have a lot more room to fall. How far?
For the Nasdaq, my first target is 1,750 – that’s about a 17% fall! And longer term, don’t be surprised to see it fall even further.
Why am I so negative on U.S tech stocks? Because the underlying businesses and profits are slowing so rapidly that most tech shares could get cut in half and still be overvalued.
Want specific examples? Here are three tech stocks that I think are heading even lower:
Micron Technology
Micron’s stock is trading at 61 times earnings even though the company reported a horrific first quarter:
- Micron reported profits of $193.2 million. Of course, the company recorded a $230 million gain on the sale of designs and technology to Intel. Excluding that would mean Micron was in the red this past quarter.
- Wall Street was expecting $1.34 billion of sales, but Micron only delivered $1.23 billion. That’s also less than the $1.31 billion posted during the first quarter of 2005.
To me, the entire computer industry is like one big food chain … when the antelope is hungry, soon the lion will be, too. For that reason, I like to gauge the health of a company by looking at its business partners. Well, Dell is Micron’s biggest customer, and it’s starving!
Just last week, Dell reported horrible first-quarter results:
- Profits were $0.33 vs. the consensus estimate of $0.38 and year-ago results of $0.37.
- Sales were $14.2 billion vs. the consensus forecast of $14.5 billion.
As of last July, Dell had beaten estimates for 18 straight quarters. Now it can’t even make its numbers. Quite a turnaround, don’t you think?
And Dell said it expects more weakness in its second quarter. Clearly, the company is in trouble, and that is going to hurt Micron.
Micron is around $15 today. My target? $5 by the end of 2007.
Intel
Intel reported its first-quarter results in April and they were awful …
The company earned $0.23, exactly what Wall Street expected. No problem, right? Well, anyone who took the time to read the fine print would have seen a virtual dumpster of weak data.
Here’s a very telling statement from Intel CEO Paul Otellini:
“We believe PC growth rates have moderated over the course of the past few quarters, leading to slower chip-level inventory reductions at our customers and affecting our revenue in the first half of the year.â€
Let me cut through the corporate-speak for you: Intel’s business is slowing. Just look at the signs …
Slowdown sign #1: At the beginning of the year, Intel bragged that it would increase its revenues by 6% to 9% in 2006. Wrong! Intel now says that its revenues will drop by 3% in 2006!
Slowdown sign #2: Intel’s per-share profit of $0.23 translates into $1.3 billion. That sounds like a lot … until you realize that it’s 38% less than the company made in the same quarter of 2005.
Slowdown sign #3: Intel said its second-quarter revenue would be between $8 billion and $8.6 billion – that’s way below the Wall Street’s forecast of $8.85 billion.
Slowdown sign #4: Intel announced that it would cut its capital and R&D spending by more than $1 billion in the second half of the year. When a company cuts costs, that usually means it expects business to slow.
By the way, that’s a very sharp contrast to Advanced Micro Devices, which said at the beginning of April that it would boost its equipment spending by about $300 million to $1.7 billion. Speaking of AMD …
Slowdown sign #5: Just last Thursday, when Dell posted a dismal drop in first quarter earnings, the company also announced that it would begin using AMD processors in some of its high-end servers. In other words, Intel just saw some of its business evaporate.
This is significant not only because of its current impact, but because of the longer-term implications. See, Dell previously maintained an Intel-only policy. This latest move signals a major departure from that strategy.
At the moment, the company is saying it won’t stop using Intel’s processors in its broader product line. But that could change at any moment!
Especially when you consider that Dell’s business is shot and it’s looking to cut costs anywhere it can.
Intel is currently trading in the $17 range. My target? $9 by the end of this year.
Juniper Networks
Juniper makes routers that are the backbone of the Internet. But the company’s got a host of problems:
Problem #1: The company has always been number two in its space. After all, Cisco Systems outsells Juniper by more than two to one.
Now Cisco just delivered a very cautious outlook for the second half of 2006. That tells me that business is worsening across the industry.
Problem #2: Plus, Juniper is heavily dependent on the telecom industry, which is struggling with overcapacity and falling prices. That’s a deadly combination.
Problem #3: Juniper’s customers are all fighting over the scraps in a mature, slow-growth industry that’s suffering from falling prices.
Problem #4: Juniper has missed consensus estimates for the last two quarters in a row.
Problem #5: Despite everything, Juniper’s stock is selling for an insane 29 times earnings and 4.4 times sales.
Problem #6: There are serious questions about Juniper’s backdating of its stock options.
To me, backdating options is just another way for company executives to enrich themselves at the expense of shareholders. Here’s how it works:
Stock options have no value or cost if their exercise price is exactly equal to the current share price.
However, if the options are priced a penny below the market price, then each has an intrinsic value of one cent. In turn, the issuing company needs to subtract that penny as an expense from its reported profits.
The dilemma is this: Some companies that backdate their options are changing an option’s price after the fact, boosting the value to the recipient without having to record a corresponding expense against earnings.
The Center for Financial Research and Analysis, an accounting-research firm, looked at 100 companies that issued a high proportion of options relative to their total executive compensation. Out of those 100, the firm identified 17 companies that fit a suspicious profile: Juniper was one of them.
Given the deteriorating fundamentals, a lofty valuation, and possible accounting problems, I believe Juniper’s stock could very easily lose half its value within the next year. That would make it a single-digit stock!
Over in Asia …
While all these companies are failing miserably here in the States, many overseas firms are prospering. And their stock prices reflect that.
Most investors were licking their wounds from the largest one-day Dow Jones loss in three years; I was licking my chops while I watched the Shanghai Composite Index surge by 4.3% in a single day to 1,602.83.
Think about that: 4.3% in a single day!
If U.S. stocks enjoyed that type of surge, the talking heads on CNBC would run out of superlatives and individual investors would be jumping on the bandwagon in record numbers.
I’ve been telling you this forever, but I’ll say it again: If you haven’t devoted a meaningful part of your stock portfolio to Asian stocks, you’re missing out on some of the best stock profits you’ll see in years.
And for the record, I believe the Asian boom is only in the third or fourth inning of a very profitable ballgame. That means there are plenty more good times ahead.
Here’s my three-pronged survival approach:
1. In times of turmoil, cash is king. I suggest you move one-third to one-half of your portfolio to good, old-fashioned cash.
2. The fastest growth and many of the most reasonable valuations are found in Asia. If you’re going to stay invested in stocks, allocate a meaningful portion of those dollars to Asian companies. If you want broad exposure in one fell swoop, check out the ETFs I told you about on May 9.
3. If you have some dollars you’re willing to put at risk, a diversified basket of carefully selected put options could double or triple in value.
Best wishes,
Tony
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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